The Case For A Supertax On Big Bank Bonuses

The big banks are pre-testing their main messages for bonus season, which starts in earnest next week. Their payouts relative to profits will be “record lows”, their people won’t make as much as in 2007 (except for Goldman), and they will pay a higher proportion of the bonus in stock than usual. Behind the scenes, leading executives are still arguing out the details of the optics.

As they justify their pay packages, the bankers open up a broader relevant question: How much bonus do they deserve in this situation? After all, bonus time is when you decide who made what kind of relative contribution to your bottom line – and you are able to recognize unusually strong achievement.

Seen in these terms, the answer is easy: people working at our largest banks – say over $100 bn in total assets – should get zero bonus for 2009.

The big bank executives make three points in favor of paying bonuses for 2009.

If the bonuses are not paid, people will leave our major banks. It’s unlikely that many good people will leave, but if they do move to smaller institutions that are not Too Big To Fail, that’s good for the rest of us.

Big banks made these profits fair-and-square, so the bonuses belong to the workforce. This is wrong at two levels (a) the profits in 2009 (and 2008) were solely the result of massive government intervention, designed at saving and recapitalizing big banks, and (b) the recapitalization part of that strategy only works if the profits generated are retained – not if they are paid out.

You cannot now tax the bonuses for 2009 without violating all the norms of reasonable taxation – i.e., that it not be retroactive, not be confiscatory, and not mess seriously with incentives. Ordinarily, these are good arguments. But today’s circumstances are so egregious that we need to take highly unusual steps. The banks and their key employees are so far from understanding what they did wrong, they don’t even have a framework within which they can understand what they need to do right going forward. This industry needs a wake-up call.

The administration should immediately propose and the Congress must at once take up legislation to tax the individuals who receive bonuses from banks that were in the Too Big To Fail category – using receipt of the first round of TARP funds would be one fair criterion, but we could widen this to participation in the stress tests of 2009.

The supertax structure being implemented in the UK is definitely not the right model – these “taxes on bonuses” are being paid by the banks (i.e., their shareholders – meaning you, again) and not by the people receiving the bonuses.

Essentially, we need a steeply progressive windfall income tax – tied to the receipt of a particular form of income. This is tricky to design right – but a lot of good lawyers can get cranking.

And we should be honest about the distortionary effect that even proposing such legislation will have on incentives. It will send a signal that income generated by working at big banks is less secure – all employees of these banks should be looking over their shoulders; sooner or later, the Internal Revenue Service is coming. This is particularly relevant for 2010, which looks set to be another bumper year for the financial sector.

At this stage, tilting the playing field towards smaller participants in financial markets is not a bug, it’s a desperately needed feature.

63 responses to “The Case For A Supertax On Big Bank Bonuses”

Businesses have to be allowed to pay their executives and employees what the market will bear, that’s all part of capitalism. That being said, I think there should be a tax on corporations based on executive pay/bonuses. Let’s call it a “Stupid Money” tax, if you will. Basically, take the average of the wages of all employees below VP level and tax the executive pay/bonuses above a certain percent of that number.

Say the average of the employees salary is $40,000. If the CEO’s salary/bonus package is over 50 times that, then an an extra tax is placed on the corporation on the overage. Use some kind of the same formula for bonuses for VP’s, partners, etc. Just to make it fun, include the wages for overseas factories in figuring the workers average.

I was just listening to Yves Smith on my I-pod. I think I need to get more hobbies or stay away from these sites for a week. It just really really enrages me. I don’t understand how these bankers can be so so selfish. Did we just ingrain this stuff so deeply into these guys in the 80’s they just don’t know any other way??? I remember reading about Michael Milken in Forbes, living in the Penthouse prison and thinking “What are these guys gonna do when they see NOTHING happened to this jerk?”

“Essentially, we need a steeply progressive windfall income tax – tied to the receipt of a particular form of income. This is tricky to design right – but a lot of good lawyers can get cranking.”

I have nothing against a windfall tax on financial institution employees who benefited from taxpayer / fed policy bailouts, as long as it’s structured so it doesn’t penalize genuine entrepreneurs, inventors, et al who make justifiable windfalls in any given year. In other words, it would have to be tied to TARP or any entity that has access to the fed funds rate.

Alternatively, a much simpler–and more impactfull solution all around–would be to increase net capital rules or legislate lower leverage ratios all the way down to 2:1 or 1:1. If you did that, all these jackass financial institutions would have to keep most of the cash in their coffers with which to speculate, instead of distributing the profits and levering up the tax payer’s money via fed funds borrowing.

Taxing employees alone misses the corollary point that–if you believe, as I do, that most of the profits earned by big banks this past year are in fact undeserved spoils from massive taxpayer subsidies–shareholders and creditors of these banks have benefited unduly as well. Remember that outside shareholders in particular have been a potent spur to greater risk taking by big banks, as they have pressured management to pursue higher profits.

To the extent a windfall bonus tax on employees encourages banks to pay shareholder dividends or retain capital instead, shareholders–many of whom are in fact senior employees, by the way–will receive undeserved benefits, too. Many have already done so in the form of the huge upward price moves many of these bank stocks have made from their recent lows.

Given the problem–inflated profits at banks resulting from windfall taxpayer subsidies–I believe a more effective solution would be to impose a windfall profits tax directly on the banks themselves. Base it on operating profits before compensation expense. This will capture a great deal of the undeserved wealth these institutions have transferred from taxpayers’ pockets most effectively. It should also reduce opportunities for tax avoidance shell games.

After that, we can let employees and shareholders squabble over the remainder. It will be their problem, not ours.

Some rather good news came over the wire over the weekend……so, May….be…

Whenever you hear some pol, teabaggers, and others of like minds whining about taxes and how big government is the problem (and not the solution), maybe they should pick up the book by Malcolm Gladwell, Outliers: The Story of Success; the book includes the author’s observations about how the financial success of people such as Microsoft’s Bill Gates (a MIT dropout) isn’t solely (if not mostly) depended upon by Bill Gates’ own efforts. On the sidebar of the link at the time this was posted here at Baseline, there was another comment that reflected the exact thinking Mr. Gladwell tried to dispel in the book; the Center-Right myth and argument that financial success evolves mostly out of one’s own efforts rather than from any help from (Big) government: “I liked his book until I realized he is an Obama type, who is bright, convincing but in the end has an agenda of redistribution of income ,power, prestige etc. Sorry Malcolm I should have left the book in B&N when I saw you are a staff writer for the New Yorker.“ Of course, if you work for, let’s say, a TBTF bank, one would think that your financial fortunes would also be a reflection of one’s own strong work ethic–being rewarded with top salaries and bonuses; and that the government’s role in your success at work is only really minimal—I would beg to differ.

We wouldn’t be having this discussion at all if our “trusted guardians” at Treasury (etc) hadn’t let the big (TBTF) banks re-pay TARP, but I mean, heaven forbid we demand accountability from our Government…

Simon: “Essentially, we need a steeply progressive windfall income tax – tied to the receipt of a particular form of income. ”

THANKS Simon, for yet another important post!!

Just 1 question: what do you mean by tied to receipt of particular form of income? Only to a bonus? But why should that be? Those TBTF=TBTE banks would have been collapsed, just like Lehman, if not for the involuntary largess of the taxpayers. Hence, the bank employees would have been unemployed, if not for the bailouts. Hence, their salary is a windfall income too!

In a reply to a recent post by James I proposed a radical solution for the current radical situation:
Having temporarily not just a federal minimum wage, but also a federal maximum wage. All bonuses and gifts in natura are calculated to a cash equivalent.
All total income above the federal maximum wage of $ 300.000 (= 20 x minimum) is taxed at 100%.

The proposal got only 1 objection (inventors of the next big thing still being allowed to make a billion; however, who ever needs a billion) :-).

How come that in any other sector employees currently have zero wage negotiating power, while in the financial ‘services’ sector — even though some 100.000 lost their job — the ones remaining can demand ever increasing salaries. Normal supply and demand laws don’t apply for those workers.

In reply to threats by London bankers to leave the city, a senior regulator said: let them go, that might be very cost effective for the UK taxpayers.

Also, I suppose (please correct me if I’m wrong) that if a non-US based company wants to operate as a bank (bank holding company) in the US, they need to apply for permission. So, let those over-the-top-bonus-banksters leave the country, set-up shop in the Bahama’s (or another black market criminal tax haven), and then deny them permission to operate in the US!!

In theory they need permission but we are obligated under the WTO and NAFTA(for Canadian and Mexican banks) to allow them to operate in the US. While a whole another story entirely Canada is one of the greatest obstacles in the whole G20 to any financial reform. Notice you don’t hear much about Canada in all these discussion of the financial crisis.

At one time the purpose of higher education was to educate people to enter the civil service. But in the evolution of academe, public service came to be viewed as second-rate to the private sector. And within the private sector there was an evolution, or devolution, into a “neo-classical” economy that elevated the free-markets to the highest form of good.

Put another way: You now have weak government and an educated elite who serve a rent-seeking financial sector to the detriment of other vital institutions. The whole system is out of kilter.

“In theory they need permission but we are obligated under the WTO and NAFTA(for Canadian and Mexican banks) to allow them to operate in the US.”

Good grieve, that sounds like a blanket permission.

Look what happened with Icelandic banks wreaking havoc in some European countries: Iceland, not being part of the 27 member EU, but being part of the EER (EU Econ. Region), has the right to have its banks operate in the EU, without EU regulators knowing the banks books.
This is a recipe for disaster, and disaster has struck.

It’s new to me that WTO has anything to say about cross-border banking. If so, then the rules must be re-written. Regulators have a very hard time to regulate the banks within their jurisdiction. It seems insane to be forced to accept foreign banks.

+
“Notice you don’t hear much about Canada in all these discussion of the financial crisis.”

Indeed, but I’d read, a.o from Leo Kolivakis of Pension Pulse, that Canada has a great banking system.
Do you have other info?

Canada has a right-wing minority government with a free-market economist as our prime minister. The other three parties could form a majority government if they agreed to work as a coalition. But this has not happened.

That said, Canada is hosting the next G20 Summit and reportedly our minority government has decided to make nuclear non=proliferation the top priority. This would displace international financial regulation as the most important agenda item at the G20 meeting.

Good idea. Doesn’t matter if its a perfect plan, the point is to send the message – ENOUGH. What the big banks are doing isn’t capitalism and these employees didn’t “earn” the money, they gamed the system.

Come to think of it … I should have said the other four political parties. They being the Liberals, New Democrats, Bloc Quebecois (French separatists), and the Green Party (which have yet to win a seat in Parliament).

Tippy you are correct. At one time from mid 40’s to late 70’s the federal civil service was known abroad as the ablest and best administered civil service. Particularly the Finance department excelled with the ability to have their advice received and accepted as the basis of public policy. The downfall of all public administrations was the politicization of the deputy ministers and over time wedged its way further into the departments. Today civil service sways with the end and their focus is to keep quiet. Note how the regime of Harper rejects outright the position put forth by several past deputy ministers to use the valued added tax (GST) to balance the budget over 4 years.

1) Where are the profits coming from? How in the year of The Great Recession is it possible for the once-crippled financial sector to reap such massive profits?

2) What was the purpose of TARP? To save the US economy? (If so, crappy job thus far; realize “it could be worse,” but the loss of millions of jobs and a look around at the unprofitable businesses in auto, airline, newspaper, etc. makes it appear that the economy remains in horrible shape.)

3) Was the purpose of TARP to save investment banks? Why is this the job of the US government? What policies are being initiated to prevent investment gamblers from wresting so much capital out of the economy and out of the federal coffers?

4) What does it mean to be a bank holding company? Why is the FDIC responsible for Goldman Sachs? What does the US government gain from this change in Goldman’s status? Certainly, the move to bank holding company was much more profitable than any analyst predicted last year.

5) Why didn’t Paulson, when he announced TARP, explain that massive bonuses in the billions needed to be paid to the investment community in order to jump start an economy that needs far more than a new battery?

6) Why isn’t ANYONE in Washington advocating for the reinstatement of Glass-Steagall? When did the focus of politicians become pampering and propping up the investment banking sector?

7) Banks reaping profits as the US treasury sees its largest deficit – seems like the US went into extraordinary debt so that GS could pay out the bonuses to bankers who’ll cry like babies if they don’t get what they want. The great deal for Goldman is a terrible deal for the US. Part of “rational markets,” I suppose. Their gain is our loss…

On several blogs I’ve commented some time ago that anybody depositing their honestly earned money at those bailed out, tarped, bonus banksters is a CO-CONSPIRATOR IN CRIME.

I proposed to deposit your savings at a sound credit union or community bank, while leaving your underwater mortgage at the big bank (in case you want to default).

I just came across great campaign this at the site of Chris Whalen, an independent bank researcher at ‘Institutional Risk Analytics’ (=IRA).

QUOTE
The team at IRA had a fairly hectic holiday thanks to Ariana Huffington of the The Huffington Post and Rob Johnson of the Roosevelt Institute. Both contacted us and asked IRA to provide the technology enablement for the “Move Your Money” campaign. The basic objective of the “Move Your Money” effort is to give American consumers a simple means to find solvent banks in their community, smaller community and regional banks which can serve as alternatives to the large zombie money centers.

IRA has donated a web services widget to support this noble effort to send a message to the banksters. The IRA search widget allows users to look for banks by zip code that have at least a “B” rating on the IRA Bank Monitor’s stress index. This widget is an example of many such tools that IRA provides to our B2B customers and affiliates. If you or your company would like an IRA web services widget of your very own design, please contact IRA CEO Dennis Santiago at our HQ in Torrance, CA.

As we told the readers of the The Huffington Post last week, there are almost 5,000 banks in the US that were rated “A+” through “B” on IRA’s Banking Stress Index as of Q3 2009. If you don’t like the way that the large banks are behaving in Washington, then vote with your feet. Go open a new account at one of those 5,000 or so righteous institutions. Introduce yourself to that community banker in your home town to whom you have never spoken.

Of note, in the first 48 hours of the the “Move Your Money” campaign, IRA logged more than a quarter of a million search inquiries. Think we’ve had an impact? More on the “Move Your Money” effort in the next issue of The IRA.

On several blogs I’ve commented some time ago that anybody depositing their honestly earned money at those bailed out, tarped, bonus banksters is a CO-CONSPIRATOR IN CRIME.

Instead, deposit your savings at a sound credit union or community bank, while leaving your underwater mortgage at the big bank (in case you want to default).

I just came across this great MOVE YOUR MONEY campaign at the site of Chris Whalen, an independent bank researcher at ‘Institutional Risk Analytics’ (=IRA).

QUOTE
The team at IRA had a fairly hectic holiday thanks to Ariana Huffington of the The Huffington Post and Rob Johnson of the Roosevelt Institute. Both contacted us and asked IRA to provide the technology enablement for the “Move Your Money” campaign. The basic objective of the “Move Your Money” effort is to give American consumers a simple means to find solvent banks in their community, smaller community and regional banks which can serve as alternatives to the large zombie money centers.

IRA has donated a web services widget to support this noble effort to send a message to the banksters. The IRA search widget allows users to look for banks by zip code that have at least a “B” rating on the IRA Bank Monitor’s stress index. This widget is an example of many such tools that IRA provides to our B2B customers and affiliates. If you or your company would like an IRA web services widget of your very own design, please contact IRA CEO Dennis Santiago at our HQ in Torrance, CA.

As we told the readers of the The Huffington Post last week, there are almost 5,000 banks in the US that were rated “A+” through “B” on IRA’s Banking Stress Index as of Q3 2009. If you don’t like the way that the large banks are behaving in Washington, then vote with your feet. Go open a new account at one of those 5,000 or so righteous institutions. Introduce yourself to that community banker in your home town to whom you have never spoken.

Of note, in the first 48 hours of the the “Move Your Money” campaign, IRA logged more than a quarter of a million search inquiries. Think we’ve had an impact? More on the “Move Your Money” effort in the next issue of The IRA.

ECON, when you say the federal civil service do you mean the American or Canadian or both?

Thinking my comment through more clearly … In the past elite universities like Oxford and Cambridge educated men for the clergy and then the civil service. So there was a higher purpose to education. Spiritual and social. (Patriarchy and hierarchy aside.)

I was listening to some of the philosopher Michael Sandel’s lectures. The idea education includes the capacity for moral reasoning strikes me as very important. I mean what are all these highly-educated people today going to do with the knowledge they’ve acquired?

As for cutting the GST during a recession … Harper is a free-market economist. Tory governments who claim to be fiscal conservatives tend to leave huge government debt that the Liberals clean up after.

Yes, Credit Suisse did exactly that. Employees were livid, of course, but I think they’ve made out like bandits, since they got paid in toxic assets at market value at the time, and most of them have increased in value since.

Like TBTF, it would be better to pay no attention to this issue, that is, ignore it as much as possible.
Much better to keep pulverizing the not-so-dead horse that is the terrible danger of a second Great Depression, which has not passed in any way!
I once again urge Mr. Johnson and Mr. Kwak et al. to TAKE A STAND in favor of the indefinite extension of Federal Unemployment programs and another stimulus package to prevent the dreadful state budget cuts that are “looming on the horizon”.

England wants to tax these bonuses at 50% and Goldman Sachs says if they do they will move to Switzerland. My plan would require all the civilized places to live in the world to have a united front on this type of dare. Switzerland should say they will tax the bonuses at 50%. If these people like having a military to protect them, like having police show up if there house is burgled, if they like pot holes filled, they need to pony up to pay for what they get as a citizen anywhere. If they want to keep all their bonus money, let them go live in a failed state, like Somalia. Enough with the blackmailing by these people who may as well be cooling their heels in jail for what they’ve done to much of the world.

Perhaps what needs to be done is to base this year’s bonuses on some sort of “income averaging” over the past 3-5 years? Of course, you’d also have to factor in bonuses paid out in pre-09 tax years. Would this end up in a de-facto clawback? That I don’t know, but I find it incomprehensible that the banks can pay themselves bonuses based so much on what the government did, not there own wise actions. Has the U.S. Congress become a “fantasy based reality show”, or do they really have the power and/or inclination to do the right thing at all? Truly puzzling, disappointing, and approaching infuriating.

In what possible way does a posting to a couple articles constitute fact? This is the problem with both Baseless Scenario and other blogs (and the comments posted to them them) of this ilk: they consist of superfluous, generalized postings with nothing but naive populist support to lend them credit. It’s generally not even worth replying — which is why, I think, comments heavily lean anti-capitalist on these boards. Anyone actually capable of analyzing the issues objectively feels it’d be a waste of time given the intellectual laziness (and the ease with which you suckers gobble it up) of the writers.

I challenge you, markets: make one objectively true statement here to back up the original posting.

By objectively true:
– If a generalization, it must be factual, not based on opinion or some fuzzy definition of “well, everyone knows that.”
– If a specific example, quote the source and context.

Here’s just ONE example of highly flawed logic argument from the post above:

The big bank executives make three points in favor of paying bonuses for 2009.

If the bonuses are not paid, people will leave our major banks. It’s unlikely that many good people will leave, but if they do move to smaller institutions that are not Too Big To Fail, that’s good for the rest of us.

– Who are the “big bank executives” exactly?

– Who says it’s “unlikely that many good people will leave”? That sounds suspiciously false. If you’re good at what you do, and you’re undercompensated for it, why would you stay? This doesn’t just apply to financial industry workers.

– I’ve yet to hear a clear definition of “Too Big To Fail,” and to talk about such institutions without one is intellectually lazy.

– In what way is moving to “smaller institutions” good to the “rest of us”? And who constitutes “the rest of us”?

The fact everyone reads this tripe and just eats it up is appalling. And this is just one example from a posting littered with logical fallacies! What is happening to critical thinking these days?

More like right on Econ Dude…. well said!! I’m actually disappointed in myself whenever i read responses to various blogs, generally a waste of my time. but i couldn’t help but notice that the majority of responses are written between the hrs of 9am and 5pm… must be aides to Barney Frank or Maxine Waters… or maybe even Christopher Dodd…

I’ve discovered Johnson’s blog only recently. I was surprised how poor it is given how frequently he’s cited online. The writing is remarkably juvenile and the logic laughable. Is this state of economics in academia these days? It’s pitchforks and rabble-rousing. It’s lamentable.

You need to re-read your Aesop’s Fables, where the Masters of the Universe were called Lions. “Lion’s Share” is actually _100%_ !, not just a majority. “Lions” have no shame.

The Lion’s Share

The Lion went once a-hunting along with the Fox, the Jackal, and the Wolf. They hunted and they hunted till at last they surprised a Stag, and soon took its life. Then came the question how the spoil should be divided. “Quarter me this Stag,” roared the Lion; so the other animals skinned it and cut it into four
parts. Then the Lion took his stand in front of the carcass and pronounced judgment: The first quarter is for me in my capacity as King of Beasts; the second is mine as arbiter; another share comes to me for my part in the chase; and as for the fourth quarter, well, as for that, I should like to see which of you will dare to lay a paw upon it.”

“Humph,” grumbled the Fox as he walked away with his tail between his legs; but he spoke in a low growl.

“You may share the labours of the great, but you will not share the spoil.”

Hello, I’m new on this page, but after reading this post I remembered something I saw on a video of the admissions to Oxford and it was a man saying in latin something similar to what in english would be: What really matter is not what you learn but how do you use what you learn.

So I guess that all that stuff of bailout, bonuses, etc… is a non-sense talk, I guess that the right path is to identify and change what has led us to the current situation and this is a greedy way of life.

Few, very few companies nowadays focus on the satisfaction of their workers but more to getat least 0.01% more earnings than the previous year. Out of bussiness world, many many people if they can try to have more, look better, … than their friends, neighboors, … It’s like that today’s society is more a group of individuals than a community that work for the common well.

Do you really think that banks are healthier than in 2007? Ok, some might be healthier but not fully healthy, profits??? I guess that it is cooking cooked books.

Those so talented bankers that have made this mess should be left go and those who are too lazy to send resumes to other companies or think that no one will hire them get paid 0 dollar until all the books are fine. Also make companies’ books publicly available so any investor or homeless can see how the company is going on so it would prevent enrons, madoffs and toxic assets…

And another one thing I think… Leave all the companies fail now, but not tomorrow, today, and other smaller companies will rise in few time, money is there, it just go to the wrong pockets.

I still favor capitalism, I just think that there should be limits and safeguards against the rampant stupidity that can rear it’s ugly head when capitalism is allowed a completely free hand. There should be a balance between complete freedom and protecting the masses.

While I agree that there should be a minimum wage, I also think that companies need to reward those who are proven leaders. There is also such a thing as “stupid money,” where those rewards have become so great as to dwarf all sense of reason, and if companies want to give their execs such huge rewards, they can pay taxes on those pay packages.

Are you saying that CEO’s and other’s on the upper end of the corporate ladder should not make more money than a first year employee who works in accounting or marketing?

“It’s all part of capitalism”.
If this situation was really about capitalism then these banks would have failed. Failure is the risk in the risk/reward scenario. These bankers have essentially been given free reign to make an obscene pile of money while the rest of the economy suffers. Their irresponsible risk taking caused a meltdown that could only be rescued by the government. Of course, with these massive bonuses, the bankers will be able to contribute to the political machinery that saved them and continue to lobby against meaningful bank reforms.

Unfortunately, failure is the risk in the risk/reward scenario of unfettered capitalism which is why we can’t afford a completely unfettered capitalistic society.

Republican economic policies led to the repeal of Glass-Steagel and the merging of traditional banking and investment banking. Republican economic policies led to the ignoring of the dangers of derivatives. Republican economic policies led us to this disaster we find ourselves in.

Convoluting tax laws is a poor way to resolve the distortions of the financial industry (and is unlikely to work). There is no alternative but to resolve the root cause.

There is nothing new about the bubble. If banks are unleashed to print credit/money as they wish, they will naturally do so; because this is how they create income. In the absence of restraints, banks will extend loans not just to subprime borrowers but to pets and to alien invaders. Undoubtedly, they will also engineer new junk papers to hide the risks and sell these loans to investors. And, given enough hush-money, they will get the rating agencies to assign low credit-risks to the junk (technically speaking, this would not be incorrect because the credit risk may be minimal, in contrast with the liquidity risk).

In short, the prescription for bubbles is to unleash the banks (including the Fed) to print as much credit as they wish. The specific packaging of this credit into funding one or another Ponzi bubble, whether housing, stock market, or other assets is insignificant, as history amply supports.

There is no alternative to returning to simple basics: set strict regulatory limits on credit creation by the banks (including the Fed, official banks, shadow banking and all other entities authorized to print money and provide credits). There is no value for anyone (except bankers) to permit banks to use their depositors money to pursue gambling.

A side effects of restraints may create a level field for the financial industry. Too-large-to-fail could not offer greater attraction to depositors, or investors (as compared with too-small-to-be-rescued-and-to-pay-lobbiests-to-destroy-regulations.) Needless to say, compensation will likely be normalized as soon as banks are unable to build Ponzi leverage bubbles.

Mmm…good questions… here are some clues as to how banks make profits:
(1) Banks make money by giving loans. If they can borrow money near 0%, thanks to the Fed, and collect 21% on credit card loans, or 12% on mortgages, this provides them huge income. Needless to say that, as long as the Fed floods the market with ez-money at o%, banks can continue to squeeze borrowers for huge profits.
(2) Banks can also create revenues by manipulating their accounting. For example, say they have a junk paper with face value of $100, whose underlying mortgages are non-performing. Suppose this junk paper could not be sold, except at $10, and the bank accounted for it as $60 in its books. While the paper still cannot be sold, the bank may declare its new value as $80, creating fake revenues of $20.
Needless to say that, since the bank is too-large-to-fail it can continue to mark-to-market its junk assets in order to create such revenues and pay bonuses. Eventually, if the assets become complete junk, the taxpayers will foot the bill anyway.

Thank you for your insight into this situation with the bonuses at the too big to fail banks. I agree that there should be 0 bonus for those employees that work at those banks. They did not earn any bonus as you pointed out. Also, if this causes these large banks to lose people to perhaps smaller banks then that is also a solution to the problem of the ‘too big to fail banks’. That will help our system out down the road. I really see no downside to your plan.

In what ways can we (the public) promote this idea? In your opinion why isn’t there more shareholder outrage against this compensation? I believe they are the people who should determine/influence compensation/bonus not the boards of directors.

One other comment: I have been working in the manufacturing (casting) business for the last 30+ years and I have watched it shrink relentlessly due to worldwide competition. This has really caused pain to real business owners and 100’s of these companies have failed and lives have been changed. These large banks are not run by owners, they are run by hired hands. My point is who are they accountable to? Heads they win, Tales we (the taxpayer) lose.

Regarding the last paragraph, I guess that the compensations and the banking industry will normalize as soon as the banks who control the Governments are closed, those banks just sink countries into debt and are able to control their governments and make wars for their own profit, from the too-big-to-fail to the central banks. But today not just banks control Govts, also prime materials companies, …

Since Rotschild with the wars between Britain and France and before the gold workers in what is today (surprise!) “The City” in London, home of many big companies and BANKS, until today with wars made for esoteric reasons ¿war in Iraq? Halliburton had a multi-million contract short after the “end” of war in Iraq, wasn’t Halliburton related to Dick Chenney who was in the Bush cabinet?

Is that kind of CRAP what brings problems to countries, in a truly democratic country with really free people, no debt would be issued, no people would suffer from other’s mistakes but as this is an uthopy we can at least aspire to regulate companies to avoid becoming TBTF and avoid them to become a danger for the rest of people.

I guess that the banking industry, as the backbone of almost each developed economy, shouldn’t innovate and remain in what it was on its beggings and just change things in favor of people with almost 0 risk-taking.

Simon, I wholeheartedly agree, with the followng comments. Rerun the stress tests using the old accounting rules to determine valuations of assets and see if anyone passes (since they have been busily creating an even larger pool of derivatives since the crisis) and reset capital based on this (have a moratorum/freeze on all pay until this is accomplised by Barofsky’s office). Announce the removal of all forms of government guarantees to all banks, with the exception of the standard FDIC plan, and increase the FDIC charges to all large (the top 19 at least) banks. Lastly, conduct hearings to have the banks explain, in detail, exactly what they have done to earn these immense profits when virtually all of the country is trying hard to just survive.

What I understand about Carol comment, is that in the current situation, where many CEOs moved by greediness have brought the World’s economy to an extremely bad shape, it’s ununderstandable that a CEO still earn in ONE year more than what an average employee earns in ALL its working life and also after doing a pretty bad job those CEOs.

It is high time to face the fact that this outcome (i.e. bank profits and bonuses) is the direct result of the stupidity of government policy initiatives. All of the banks and financial institutions that took took TARP should have been taken through receivership not bailed out. If that had been the case the entire discussion here would have been irrelevant. Creditors, stockholders, employees, and other stakeholders would be wiped out. It is the first of what will be many knock-on effects of not allowing the market to function. Why dont we start by creating a repayment system clawing back the pay of congressmen and senators who voted for continued financing of Fannie Mae Freddie Mac and GMAC….that is and will be the largest loss in the bailout….ironically 2 out of 3 are essentially government institutions. Or how about a special tax on those that voted for the Community Reinvestment Act. Each of these institutions were also functionally a part of the problem. Unintended consequences of short term focused decisions have laid bare the faults that exist in the US and UK system. The fact is the US is wandering down a path of frightening prospects. Make up laws as you go along to fix the problems of previously stupid fixes. No principals behind the laws just a group of new laws to adjust to the realities of the situation that were apparent at the start of the unintended consequences of the prior action. It would have been better to have thought long and hard about the long term consequences rather than surrender your intellect at the beltway on your way into Washington. For those who argue that it would have been worse to do nothing like the TARP, you live in a dream world. In the 1980s Continental Illinous was rescued through receivership which effectively harmed those responsible for the failure of the bank. In the 1990s, the US worked through the closure of hundreds of banks through receivership. Why was it so important to change the rules this time? Too big to fail? I dont think so. The answer lay in the way Treasury and the Fed dealt with the issue. Panic is unbecoming in any decision making organization and panic permeated both institutions. It was leverage through and through that broke the system. Leverage at the individuals, banks and government and a number of non financial firms. Leverage levels should be capped for all. That is the simplest tax of all.
The level is simple, lets start with a simple number 10 times, and no off balance sheet financing…..that includes the US government which is now levered at nearly 40 times when you include the discounted forward cost of social guarantees.

It is high time to exact your vengeance on the true causes of this crisis, leverage and congressional stupidity.

The Professor is right on. These gains are ill-begotten; but, folks, in reality, many are and have been. And, lots of ideological arguments are expressed to allow this ‘madness’ to continue.

Actually, nationalization last year would have been much better. We could have learned a lot from such; those mistakes would have been less painful. Now, we all just have to look at the ‘fat cats’ while they balloon to unsustainable dimensions.

We need an economic sandbox for these guys who want their ‘casino’ to be sustained. Yes, play money (though, I could soundly argue that this is what we have now) is the issue.

As a grandson of Samuelson, I would say: we can allow too big to fail to be. Okay? But, those running such would be like monks (vow of poverty) or the marines (heavily disciplined in honoring the common good).

Those cry-baby idiots on the Street are now facing the fact that the common people can see their faults (talk about naked emperor).

The financial apparatus needs to be run by those who do not salivate when a buck is passed beneath their nose. Yes, as the heart of the economy, finance needs to be run by the people (gosh, there is no greater sense of entitlement than that inculcated in the best-and-brightest).

By the way, MIT has less of this than Harvard. It’s the engineering focus that provides the damper.

As an engineer and enterpreneur who began my bussiness last year and having revenues of near an euro-million par month and exactly 197 persons under me and NOW no one over me, why I say NOW in capital letter? Because I used to hire a bussiness-man who studied in IESE (one of the World’s best bussiness schools and with ties to Harvard) and hey man, before this I was earning near 5 times the money of the person who earnt less, he arrived and said that he wanted a salary which was near 10 times the less earning worker. I agreed thinking it was worth it, well, my workers were upset at the first week, three of the first hired workers said that they would leave if the new arrived continue, I asked them all to be patient, after two months I had to fire the man because of bad choices, it seemed unable to made a successful decision, before and after this so prestigious school student was between us I took decisions but heard others’ opinions and after all decisions were accepted by consensus although my opinion was over all others as company owner.

The problem there is that people who study in Business Schools think that just for this they are talented to run a business and that’s not true, there are many things around today that are intended to find the best fit person for a work, etc… All psicological tests, etc.. are made to trick workers and find the one that will work more and complain less if he feels he is not doing the work the right way.

There is not a best way to manage people than humility and empathy and these two things lack in current bussiness-culture and this is what makes ceos to earn millions times what any middle-worker earns even if they ruin the company. How much money did Richard Fuld earnt in LEhman? $300 million… well, let me correct, as he said it was not that much. We all know where is Lehman, and where would Citigroup and many others have been without bailouts. But hey, their ceos were earning millions, and continue earning millions!

Neither Harvard or MIT or most of the bussiness schools in the world teach what they should teach to be a bussiness leader.